Intregral Theory – Market Algorithmic Development

Integral theory. Never leave home without it.  The new algorithm I’m testing is the 5-34 strategy.  I found it on a website a long time ago and the gentleman seemed to speak highly of it.  It’s a simple exponential moving average crossover strategy.  Before I go and tweak risk parameters, entry & exit locations, and overnight holdings I consult the integral framework.  Here is how.

Lines: What set of “skills” / Attributes does the stock need?  If we can define something as intangible as a “spiritual” line of development I can certainly define a volume line of development and a price line of development.  What attributes do I want this stock to have? High volume? Price great than $10? Strong beta? strong correlation with the sector?  All of these questions are valid as you do the same filtering when selecting a mate. Is she smart? Do they care for themselves, etc.

Levels: I sort of touched on this in lines by stating qualities of the lines such as High, low, medium, strong, and weak.  What level of development is the beta at? 0.02 or .95 beta?  How level of volume exists? Average of less than 1,000,000 or great than 10,000,000 on average?

States:  States are often temporary, and in my opinion, are expressed in terms of intra-day fundamentals.  Was it downgraded or upgraded? Did it just release earnings and is now in a state of frenzied buying? Are buyout rumors circulating?  These temporary bursts of volatility I  define as state dependent movement.  The stock will not move the same after earnings unless there is something that helps maintain that exuberant state.

Types: I define type as a sector.  Is it in the financial sector, technology sector, etc.  When someone asks “what type of stock it is” often people define it in a qualitative form.  Someone may ask “what type of stock is AAPL.”  “A technology company that makes computers…” a person may reply.  I don’t often hear people define stocks in terms of their lines & levels such as It’s an extremely (level) volatile (line) stocks.  They may go on to describe these attributes if asked for more information, but this is beyond the “Oh yes, Jerry is a nice person.”

Quadrants:  This section holds the bulk of my development.  We’ll go through each quadrant separately.  I have changed the order of the quardrants to make the most challenging one last (Upper-left).  We’ll start with the easiest, Upper-Right

  • Upper-Right: The external behavioral space.  How does this stock behavior.  Is it forming patterns? Does it respect those patterns? How does the stock move? Does it trend or chop?  In the upper-right quadrant, you can witness the behavior of the stock, it’s verifiable and real.
  • Bottom-Left:  What does the collective “us” think about this stock today?  I am going to repeat myself and say, does it form patterns & does it respect them. We must discriminate between these two statements in the different quadrants though.  When we look at at chart we can all see different patterns emerge, but the difference with the quadrant is do we as a collective agree that we see a head & shoulders or double top.  This is what will change the emergence of a pattern and it’s ability to fulfill it’s “destiny” from simply noticing their existence in the chart.
  • Bottom-Right:  The collective system.  Is the stock hard to borrow? Are there any regulatory or tax rules that impede or assist me trading this stock?  Are there any technology systems that I can take advantage of?  This section also holds the concept of relative strength.  Is this stock strong or weak compared to it’s sector and compared to the broader market.
  • Upper-left:  The internal space.  What does this stock think about itself?  This is a challenging conception. Does the stock even think?  I believe it does and here is why. As humans, we’re conditioned by the other quadrants to form internal conceptualization.  A “spoon” is not a spoon if we are never taught it’s a spoon.  So we can’t hold up a “spoon” and say, “it’s a spoon.” I believe the stock equivalent is the formation and fulfillment of patterns.  Since stocks can not speak (like animals) we look for patterns that define an internal state.  This dog has a wild temperament while this one likes to sleep & is very calm.  This stock is wild, volatile and usually, drops after creating a double top.  It has an identifiable unique pattern different from every other stocks.  The real philosophical issue with this quadrant in terms of stocks is that you can never enter someone elses internal state.  It’s sometimes impossible to know it exists since you never have direct access to it from an objective standpoint.  However, as humans, we can get close to understanding someone’s internal state and we call this concept integrity.  Are they telling me what’s really going on in their head?

As I develop the 5-34 strategy I will continue to post in more detail about how each of these is expressed in my code.